#Tesla Model 3 Progress

In what was likely the most anticipated earnings call ever for Tesla, the auto manufacturer / stationary storage manufacturer / full service solar provider / soon-to-be taxi service / autonomous vehicle technology company (and maybe insurance company in the near future) shared financial results for Q4 2016 and for the full year. Perhaps more importantly, it also unpacked tons of detail for what’s to come in the balance of 2017 and beyond.

Deliveries had already been announced, so no additional news was shared in the financial results call. Tesla did want to highlight that even though deliveries were slightly lower than guidance, record-high deliveries were achieved in Q4 2016.

Model 3 Production Ramp

The most anticipated news from the call revolves around Model 3, which continues to be the central focus for the Tesla team. The Gigafactory and Fremont factory continue to ramp up in parallel in preparation for the first production run in July, Tesla reiterated.

Tesla is on track for that first production run in July, and expecting to ramp up to 5,000 cars per week sometime in the fourth quarter of 2017. This rate will increase further to 10,000 cars per week sometime in 2018. This is critical, as it will be when Tesla starts working through its huge backlog of Model 3 orders (which “is still in great shape” — though, Tesla declined to comment on details since it felt stating a number was counterproductive).

This makes sense, as many folks I’ve talked to … and interacted with online … are leery about locking in a reservation for Model 3 with the timing so uncertain. That message has a tag-along effect since many people also think there’s a long wait time for Model S and X, which is interesting. I love clearing up those messages, but it sheds some light on how the masses interpret Tesla news.

In a unique insight into Tesla communications with partners, Elon shared the volume guidance it is providing to parts suppliers in terms of vehicle production per week at: 1,000/week in July, 2,000/week in August, and 4,000 per week in September. As with production estimates coming off the Tesla Factory lines, these numbers are subject to change as the real capabilities of the equipment are determined in the physical world.

Model 3 Margins

Model 3 will not be profitable on day 1. No, this is not terrible news — it is just a function of cost. Machines cost money to run, and they take people, time, and money to build and test. When Tesla starts making Model 3, few vehicles will be produced per day, per hour, etc. … but as volume ramps up, Model 3 will clearly be profitable.

As someone who spent many years as an “industrial engineer” for a large manufacturing company, it is exciting to me that Tesla is looking at the cost of production on a daily basis … even during ramp up. The “recipe” for Model 3 will continue to improve as the production lines hit the nearly vertical sections of the S-curve, eventually stabilizing sometime in 2018.

Drilling into the costs of Model 3, Tesla has taken a granular bottom-up approach — breaking each part down to commodity pricing, then building in time and cost for manufacturing, estimating reasonable margins, then pushing suppliers to deliver at or around the resulting figure for each.

This shows just how intensely Tesla is pursuing an affordable, profitable vehicle with Model 3, which speaks well to the success and viability of the car, and presumably the future of the company, which is so intimately linked with its success.

All the Gigafactories

Many people, countries, cities and virtual cities have been attempting to lure Tesla into their area for the installation of the next Gigafactory, and Tesla shared that we won’t have to wait much longer to find out where the next Gigafactories will be. Specifically, Tesla shared that “we expect to finalize locations for Gigafactories 3, 4 and possibly 5 THIS YEAR.” (emphasis mine)

3, 4 and 5 … but what about Gigafactory 2!?! The newsletter casually noted that Gigafactory 2 is, in fact, the Tesla solar plant in New York … formerly known as the SolarCity solar plant. We had been calling it the “Gigafactory” of solar all along, and it seems that Tesla took that to heart and decided to grant it full Gigafactory status as part of the SolarCity acquisition.

Considering that the original cost estimate for Gigafactory 1 was $5 billion, these pending announcements show that Tesla has no plans to slow down just because Model 3 is nearly out. In fact, it is ramping up production quite significantly over the coming years.

Service Center Improvements

In the newsletter, Tesla admitted previous issues with service center response time and noted that it has been working on it aggressively: “we are on track to reduce the global average wait time for vehicle service to less than one day by the end of the first quarter of 2017. “

Beyond just fixing the current state, Tesla is ramping up its team of remote mechanics (aka Rangers) who can perform the ~80% of service center tasks that are so minor that they can be done at the home or business of customers, cutting costs and improving response time at the same time. (I’ve had such a visit.)

Supercharger Expansion

The Supercharger network will be growing further in 2017, with the number of locations in North America doubling in 2017. The Supercharger network has proven to be a strategic advantage and Tesla continues to keep it in focus moving forward. (Also see our exclusive: “Importance of Tesla Superchargers, Battery Upgrades, Electric Car Benefits…“)

This is made clear with the addition of idle fees at Superchargers to improve availability, the addition of real-time visibility of utilization, and the cap on free Supercharger usage per year to ensure stations are available for those who actually need to charge as opposed to those who are just topping off while buying groceries.

In parallel, Tesla continues to support the rollout of destination chargers, which Tesla provides for free to site hosts … who can then lure in customers while providing free charging.

Capital & Cash

Tesla increased cash by over $300 million from Q3 to Q4 2016, to a total of $3.4 billion. Capital is trending in the right direction, but Tesla commented that it was considering a capital raise to increase the pad to reduce investor risk.

Elon noted that it would be easy for the company to be cashflow positive and generate good returns by slowing growth but that the internal team saw no reason to slow down. Following the unconventional nature of the company, Elon asked the attendees on the call for feedback if they thought Tesla should do something different.

This open mindedness to alternative solutions (no, not “alternative facts”) is so critical since it allows many, many more people to contribute to the development of a constructive solution when faced with a problem instead of sticking to “the way we’ve always done it” as a hard and fast rule as so many legacy companies tend to do.

Tesla Insurance?

Elon talked about how, with Autopilot-enabled Teslas being so much safer and a public target of 90% safer than non-Autopilot-enabled vehicles, insurance companies would be likely to offer insurance at significantly reduced rates. If this didn’t transpire, Tesla would consider selling insurance at reasonable rates — and is already doing so in some markets in Asia.

The investor letter accompanying the webcast also highlighted that the safety of Autopilot was confirmed by the National Highway Traffic Safety Administration (NHTSA) report which found that, “data show that the Tesla vehicle crash rates dropped by almost 40% after Autosteer installation.”

ZEV Credits

Elon stated that if ZEV credits were to go away, the outlook for Tesla would improve. Other auto manufacturers get more value from the credits — he noted that GM received almost $10,000 more value per ZEV credit than Tesla does. While Tesla does generate income from ZEV credits, the revenue generated in Q4 2016 was significantly lower (at $19,840,000) than Q3 2016 (at $138,541,000).

Cleantechnica.com

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